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Wesfarmers will decide within months whether to sell its $2 billion resources business after upgrading first-half profit guidance following a surge in coal production and prices to the highest levels since 2011.
Wesfarmers group managing director Richard Goyder said expressions of interest for Wesfarmers' Curragh mine and its 40 per cent stake in the Bengalla mine were due within weeks and a final decision was likely before Wesfarmers fronted investors at its next strategy day in June.
"It will take a while to work through, I would think months – certainly not by the half year results," Mr Goyder told The Australian Financial Review. "I hope [before the strategy day] but these things have a habit of dragging out a bit."
Mr Goyder said the stunning turnaround in resources earnings underlined the benefits of Wesfarmers' conglomerate structure, but questioned whether Wesfarmers would be better off without coal given growing opposition from consumers.
Wesfarmers now expects resources, which has been under strategic review for almost a year, to earn between $135 million and $140 million before interest and tax for the six months ending December, compared with previous guidance of a broadly breakeven result and consensus forecasts of about $29 million.
Full-year earnings from coal will depend on the weather (wet weather hurt production last year), but analysts expect the division to earn as much as $518 million in 2017 compared with a loss of $310 million in 2016.
The rebound in earnings from coal will deliver a welcome boost to Wesfarmers' group profits as earnings come under pressure at its largest business, Coles, and further losses are incurred at Target.
Brokers expect Coles' food and liquor earnings to fall between 1 and 2 per cent this year – the first decline since the Wesfarmers acquisition in 2007 – as sales growth slows and margins come under pressure from price reductions, while Target is expected to lose as much as $20 million before returning to profit in 2018.
Partial sell-down an option
Mr Goyder said Wesfarmers would retain coal if offers fell short of expectations and could consider a partial sell-down – "it doesn't have to be a 100 per cent disposal".
"We really like the industrials business, we think there are growth opportunities in that area, but coal is a bit different," he said.
"There is a degree of conflict in owning retail businesses and owning coal businesses. We experienced that with Bunnings when we had timber products and Bunnings' retail customers didn't like the fact we were in forestry.
"Whether it sits comfortably in the portfolio is the question. Ultimately it will [come down to] value, what we determine is the best value outcome for shareholders."
Wesfarmers confirmed in November that it was seeking expressions of interest from potential buyers after launching a strategic review early last year, when plunging coal prices and weak production sent the resources division into the red.
Analysts are upgrading their half-year and full-year profit forecasts after Wesfarmers' new guidance. Many were forced to trim estimates by between $50 million and $100 million in October, when Mr Goyder said coal would just break even in the first-half.
However, Morningstar analysts said the latest upgrade was "immaterial" in the context of Wesfarmers' group EBIT of $4.4 billion, particularly as the spike in coal prices was considered unsustainable over the medium term.
The resources division lost $118 million in the December-half 2016 and slumped $310 million into the red for the full year after a $50 million profit in 2015, prompting Wesfarmers to kick off the strategic review. The last time coal prices were as high as they are now the unit earned $370 million.
Coal output jumps
Wesfarmers said the better-than-expected results reflected higher realised prices for coal from the Curragh and Bengalla mines and an increase in production in the December quarter after the group implemented recommendations from a recent productivity review and put in place a new mine plan.
Coking coal prices have surged to their highest levels since 2011, with contract prices reaching $US311 a tonne in November. Contract prices for the March quarter are about $US285 a tonne while spot prices have fallen back to about $US180 a tonne.
At Curragh, in Queensland's Bowen Basin, overburden removal in the December quarter rose 5.2 per cent and production rose 22.5 per cent to 3.2 million tonnes, with coking coal production up 38 per cent to 2.27 million tonnes and steaming coal production down 3.8 per cent to 931,000 tonnes.
At the 40 per cent-owned Bengalla mine in the Hunter Valley, Wesfarmers' share of coal production for the quarter was 902,000 tonnes, up 11 per cent.
Wesfarmers said the December-half result would also benefit from adjustments to provisions after the settlement of the Stanwell litigation, but gave no more details.
Wesfarmers shares rose 0.2 per cent to $41.60.